UPI may be free at checkout. Consumers could still bear the cost

The final article in a three-part series examining UPI’s new merchant charge.

The first article examined the public money behind UPI’s growth. The second asked for the accounts supporting the government’s claim that MDR is necessary for sustainability. This concluding article examines the promise at the centre of the new framework: consumers will not be charged.

From 15 October 2026, the standard rate on covered, bank-account-funded person-to-merchant payments above ₹2,000 will be a Merchant Discount Rate (MDR) of 0.4 per cent, capped at ₹300 for transactions of ₹75,000 and above. The merchant, not the customer, is liable for the fee.

The 0.4 per cent rate does not apply uniformly. Specified essential and thin-margin sectors, including railways, telecommunications, insurance, fuel and agricultural inputs, will pay a flat ₹5 on transactions above ₹2,000. Capital-market payments will attract 0.02 per cent, capped at ₹300. UPI mandates or AutoPay transactions carry no prescribed MDR under the new framework, while credit-linked UPI payments follow separate rules. Person-to-person transfers, payments up to ₹2,000 and qualifying small merchants remain outside the new MDR.

On a standard-rate ₹10,000 purchase, therefore, the customer should still authorise exactly ₹10,000, while the merchant pays ₹40 as MDR. The Indian Express, citing a senior finance ministry official, reported that 18 per cent GST would add ₹7.20 to that fee. A GST-registered business may claim that amount as input tax credit.

That establishes who receives the bill. It does not establish who ultimately bears the cost.

The legal payer and the economic payer are not always the same

MDR is not a tax. It is a payment-processing charge distributed among banks, payment service providers and UPI application providers participating in the transaction. According to the Ministry of Finance, neither the government nor NPCI collects the MDR.

But stopping there creates a misleading impression. Rent, electricity, packaging, delivery commissions and payment fees may not appear separately on a receipt, but they still influence prices and margins.

A merchant facing the new fee has several choices. It can absorb the expense through a lower margin, raise prices over time, reduce discounts, encourage cash for larger purchases or stop accepting UPI for some transactions. Different businesses will respond differently. A large retailer with bargaining power and healthy margins may absorb the cost more easily than a pharmacy, restaurant or independent shop.

There is no post-implementation Indian evidence yet because the framework has not taken effect. But the underlying mechanism is well established in payment economics. Research published by the Federal Reserve Bank of Boston, using data from the United States and Canada, found that merchants typically do not differentiate prices at checkout and instead pass payment-acceptance costs through retail prices. The Reserve Bank of Australia has similarly observed that merchants that do not impose card surcharges generally incorporate payment costs into advertised prices.

Those findings concern card markets in other countries, not UPI in India. They do not predict the size of any Indian price increase. They do, however, demonstrate why “the merchant pays” and “the consumer is unaffected” are not equivalent statements.

A surcharge ban cannot make a business cost disappear

The government has instructed banks to ensure that merchants do not pass MDR to customers. UPI applications are also prohibited from imposing platform or hidden charges. A government official told The Indian Express that merchant behaviour would be monitored daily after implementation.

Such monitoring may detect an explicit “UPI charge” at the counter. It will be far harder to determine whether a retailer has raised prices fractionally, withdrawn a discount or encouraged cash for larger purchases because of MDR.

This is the central weakness in the promise that consumers will not pay. The government can prohibit a visible surcharge, but that does not prevent a business from reflecting the cost in its general prices, discounts or choice of accepted payment methods.

Retail groups have already warned about this pressure. The Retailers Association of India said the fee could push merchants towards cash, particularly for festival purchases above ₹2,000 and businesses working with thin margins. The Clothing Manufacturers Association of India has also objected to the timing and its effect on consumer-facing businesses.

Their warnings do not prove that prices will rise, but they show that the question is not settled.

“Most transactions remain free” tells only part of the story

The government says more than 95 per cent of person-to-merchant UPI transactions are worth ₹2,000 or less and will remain outside MDR. That is an important protection for everyday payments.

Yet transaction count is not the same as transaction value. A Financial Express analysis of NPCI ecosystem data estimated that, in August 2026, merchant payments above ₹2,000 represented only about four per cent of P2M volume but approximately 67 per cent of P2M value. This is an analysis rather than a figure stated in the government’s FAQ, but it illustrates why a small share of transactions can cover a substantial share of the money spent through UPI.

The merchant exemption also deserves precise language. A merchant classified under the Person-to-Person-Merchant, or P2PM, category can receive up to ₹1 lakh a month through UPI QR payments with zero MDR, including on an individual payment above ₹2,000. The official FAQ says banks will move an account into the regular P2M category only when inward UPI credits exceed ₹1 lakh a month for three consecutive months. The monthly threshold is equivalent to an average of roughly ₹3,333 a day.

Receipts are not profit. A neighbourhood business can cross that level while still paying for inventory, wages, rent, electricity and taxes. A threshold based on incoming payments does not measure a merchant’s ability to absorb the fee.

The GST treatment creates an additional complication. The finance ministry official quoted by The Indian Express said registered businesses can claim the 18 per cent GST on MDR as input tax credit. Some unregistered sellers could nevertheless have to bear GST on the MDR if they fall outside the P2PM exemption. The official acknowledged that this issue could require consideration by the GST Council.

“Free at the point of payment” would be more honest

The government’s claim is defensible only in a narrow sense: customers will not be directly billed for using UPI, and the amount displayed on an eligible purchase should not include a separate MDR surcharge.

A more accurate public statement would be: UPI will remain free for consumers at the point of payment, while eligible merchants will bear a new processing cost that may have indirect effects.

It also avoids an unhelpful argument over whether MDR is a disguised tax. Legally, it is not. Economically, however, the name of a charge does not decide who eventually feels it. What matters is how businesses respond, how prices change and whether merchants begin steering customers away from UPI.

The government should therefore publish more than transaction volumes after 15 October. It should report:

• complaints about explicit UPI surcharges;
• changes in UPI acceptance for payments above ₹2,000;
• any rise in split transactions immediately below the threshold;
• shifts from UPI to cash or other payment methods;
• the effect on small and low-margin merchants;
• MDR and GST collected by merchant category; and
• evidence of changes in retail prices or discounts in affected sectors.

The framework should also carry a firm review date. If the evidence shows reduced acceptance, increased cash use or a disproportionate burden on smaller businesses, the rate and merchant threshold should be revised.

The conclusion 

Across all three articles, the same demand remains: public accountability. UPI was expanded with public support. The government’s FAQ cites an industry estimate of roughly ₹20,000 crore a year to operate the ecosystem, but it does not provide an independently audited, UPI-specific cost statement explaining the chosen rates. Nor can a prohibition on direct surcharges guarantee that merchants will never recover the cost indirectly.

None of this means UPI should operate without funding. It means the funding model must be transparent, proportionate and open to review. Citizens should be told what the system costs, who receives the new revenue, what measurable improvements the recipients must deliver and what will happen if merchants or consumers face unintended consequences.

UPI may still appear free on a customer’s screen. That is not the same as being costless to the public.

The honest question is no longer simply, “Who is charged?” It is, “Who eventually pays?”

Sources

1. Department of Financial Services, Merchant Discount Rate on select UPI person-to-merchant transactions: FAQs, 15 September 2026.
2. Ministry of Finance, UPI continues to remain free for person-to-person transactions and 96% of merchant transactions, 15 September 2026.
3. The Indian Express, Centre plans daily tracking to see if merchants charge consumers for UPI fee, 17 September 2026.
4. The Indian Express, GST of 18% on UPI MDR can be claimed as input tax credit, 18 September 2026.
5. Reuters, India’s UPI fee faces retailer and broker pushback, 16 September 2026.
6. Financial Express, UPI’s next test: durability of the MDR regime, 16 September 2026.
7. Federal Reserve Bank of Boston, Distributional effects of payment card pricing and merchant cost pass-through in the United States and Canada, 2020.
8. Reserve Bank of Australia, Impact and implementation: review of merchant card payment costs and surcharging, 2026.
9. Ministry of Finance, Cabinet approves incentive scheme for promotion of low-value BHIM-UPI transactions, 19 March 2025